GUIDING PRINCIPLES FOR THE MANAGEMENT OF INTELLECTUAL PROPERTY ISSUES

A Summary Report
September 1997

Introduction
Generation of Intellectual Property
IP Issues - An Evaluation Grid

• Sources of Research Needs and Research Solutions
  
• IP Core Issues
  
• Combining Issues, Mandates and Arrangements on the Grid
  

Split Ownership of Intellectual Property
Industrial Standards
Mechanisms for Technology Transfer
Improving Intellectual Property Management Techniques
Competition Policy

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Introduction

The Federal Partners in Technology Transfer (FPTT) have undertaken to outline some guiding principles for the management of intellectual property within the federal government. One of the major concerns of the FPTT is that of balancing the need for consistency of management of IP throughout the government with that of having practices that respect individual departmental and agency mandates.

These principles were developed by Groupe SECOR in co-operation with FPTT members following a review of Canadian and international experiences in IP management and consultation with stakeholders with "hands-on" experience undertaken by Groupe SECOR. Background on this review and consultation is available in an accompanying document entitled "Guiding Principles for the Management of Intellectual Property - Research and Data Collection". FPTT is grateful to Groupe SECOR for having worked with its members to develop these guiding principles.

Comments and suggestions on either of these documents can be forwarded to:

Morna Paterson
Director
FPTT Executive Office
Room 281B, Building M-55
1200 Montreal Road
Ottawa, Ontario, K1A 0R6
Phone: (613) 998-5285
Fax: (613) 998-8768
E-mail: morna.paterson@nrc-cnrc.gc.ca

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Generation of Intellectual Property

The federal government generates intellectual property (IP) under a wide variety of circumstances in which research is carried out in support of public policy. For example, research may be conducted in the interests of maintaining health and safety or industrial standards. It may also be conducted in instances where market inefficiencies do not provide sufficient incentives for industrial innovation. For example, government has intervened to produce new agricultural seeds for the benefit of farmers when seed growers have not been able to capture sufficient profit from the activity.

Government may also contract with outside suppliers to have research conducted in support of policy goals. In addition, it may provide capital-intensive test facilities for the benefit of specific industrial sectors, e.g. wind tunnels, and will itself be asked to conduct research. Finally, government offers a variety of programs in support of industrial R&D.

In the course of all of these activities, IP will often be generated. This may consist of, for example:

• patents;
• copyrights;
• "know-how";
• trade secrets;
• etc.

Since the IP is generated as a result of public expenditure, it can be viewed as an asset of the Crown. While the generation of IP is mostly peripheral to the R&D activities of government, departments and agencies nevertheless have a duty to manage the asset in a manner that fits with policy objectives.

In general, the property will be managed so as to maximize the socioeconomic benefits for the country. If commercial exploitation of the asset is possible, this will be best achieved by the transfer of the property to the private sector.

At times of budgetary pressure, departments and agencies may be tempted to use IP to maximize departmental revenues. Such an approach, however, would generally not be consistent with policy objectives. Moreover, it will be intrinsically inefficient since departments and agencies tend to have little or no commercial experience and ought to rely on the tax system for revenue to support government operations. Firms should be responsible for commercialization.

These considerations lead to two basic principles for the management of IP:

Guiding Principle 1:

IP must be managed as a tool to help departments fulfill their mandates. This is its primary function. No other consideration can equal or surpass the obligation to support the departmental mandate.

Guiding Principle 2:

When government transfers IP to the private sector for commercialization, the objective is to maximize socioeconomic benefits for Canadians.

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IP Issues - An Evaluation Grid

IP management is complex. The first challenge in addressing IP management issues is to build an analytical framework to reduce the complexity. Such a framework can be based on:

• Sources of research needs and research solutions that lead to IP development, and
  
• Core IP issues.

Sources of Research Needs and Research Solutions

Departments and agencies engage in activities that lead to the development of IP according to who has need of a certain innovation and who is capable of providing that innovation.

The public sector is both a buyer and supplier of IP. The same can be said of the private sector. From the government's perspective there are six general arrangements that lead to IP creation:

• Public Sector Demand - Public Sector Solution: The need for the creation of IP is generated from government obligations and the solution to creating IP is found within the government.
• Public Sector Demand - Private Sector Solution: The need for the creation of IP is generated by government obligations and the solution to creating IP is found outside the government.
• Private and Public Sector Demand - Private and Public Sector Solution: The innovation or a research need is important to both private and public sectors so they share in its development through joint R&D funding and performance.
• Private Sector Demand - Public Sector Solution: The need for the creation of IP is found in the private sector and the solution is found within government.
• Private Sector Demand - Private Sector Solution: The need for the creation of IP is found in the private sector and the solution is found in the private sector.
• Private Sector Demand - Private and Public Sector Solution: The need for the creation of IP is found in the private sector and the solution is found both within government and in the private sector.

IP Core Issues

In the previous section, we showed how IP issues can be simplified by considering the source of a research need and the source of the appropriate solution. The model can be extended by considering core issues that affect each one of the combinations described above.

A review of the literature on the management of IP created with government resources indicates that throughout the world there are five core issues concerning the creation and transfer of public technologies.

• Competition Policy - Will the transfer of Crown-owned or created IP to the private sector lead to market distortions, such as the creation of a monopoly supplier of a good or service to government or the public?
• Split Ownership of IP - Will technology transfer lead to joint ownership arrangements between government and one or more private sector partners? If so, how can the management burden of ownership be minimized? Moreover, will technology transfer lead to split ownership of the background and foreground IP and can the split be managed efficiently?
• Industrial Development Policy - Will technology transfer lead to benefits from IP that fit into the government's industrial development plans on a national and regional basis?
• Public Service IP Development Incentives - Will civil servants receive rewards that encourage participation in IP discovery and management as well as technology transfer programs?
• Government versus Industry Standards - Are the standards demanded by government sufficiently harmonized with industry standards to allow innovations and IP developed under contract to the Crown to be applied to other markets?

Combining Issues, Mandates and Arrangements on the Grid

The complexity of the grid and the large number of issues and arrangements reflect a basic reality: IP management is complicated. Issues will vary to some extent for each of the basic mechanisms that are used to create IP.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	.	.
Inside Public Sector	Outside Public Sector	.	.	.	.	.
Joint Need	Joint Solution	.	.	.	.	.
Outside Public Sector	Inside Public Sector	.	.	.	.	.
Outside Public Sector	Outside Public Sector	.	.	.	.	.
Outside Public Sector	Joint Solution	.	.	.	.	.

Although complexity abounds, the tools for management of IP are flexible rather than rigid consisting of, for example:

• broad guidelines;
• contracts;
• licensing agreements; and
• terms for grants and loans.

Managers of IP will not have highly specific rules and regulations to guide them. The nature of their work makes them "deal-makers" rather than administrators of a detailed regulatory regime. Attempts have been made to codify the many possibilities for managing IP but the resulting documents tend to be unwieldy guides because of the level of detail that complexity demands.

The challenge for the manager of IP is to deal with a complex situation that has few detailed rules. However, the situation is better than would at first appear for the following reasons:

• most departments are active in only a few "cells" of the IP grid - managers do not need to know everything about IP;
• informal monitoring and information exchange systems are already in place so that sharing of expertise is possible;
• the flexible management tools allow "deals" to be struck that are consistent with departmental mandates.

The realization that building rules to deal with all situations would not provide a practical management tool, led to the guiding principles for managing IP described in the next few pages. Their relationship to the evaluation grid is indicated by check marks.

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Split Ownership of Intellectual Property

Split ownership of IP can occur under a variety of circumstances when government:

• conducts research with an outside partner;
• commissions R&D from a number of firms that contribute as contractors to a complex project;
• owns foreground IP when the private sector owns background IP (and vice-versa);
• conducts research for a consortium of firms;
• provides funding to a consortium of outside R&D performers.

In these arrangements, government will not always be the inventor of the IP. It may fund or contract for the development of IP. However, it has a broad obligation to ensure that licenses and contracts are devised so that the IP is exploited so as to maximize the socioeconomic benefits for Canada. This obligation is less of an issue when outsiders are paying in full for the R&D but is more significant when government is paying the bill.

Often in technologically complex projects, the contributors to IP may have different goals for its exploitation. For example, suppose that in the development of a telecommunications satellite, a software were to be developed for signal compression. The lead contractor might want to have control of the copyright for use in future satellite applications whereas a sub-contractor might want to use the software in terrestrial telecommunications. The possibility for multiple applications of a single IP must be respected as arrangements for exploitation are developed. These considerations lead to the following principle.

Guiding Principle 3:

When split ownership of IP occurs, contractual arrangements must be managed so as to maximize possibilities for commercial exploitation. This will generally translate into efforts to focus control of the IP into the hands of a single player for a given application of the IP.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	.	.
Inside Public Sector	Outside Public Sector	.	X	.	.	.
Joint Need	Joint Solution	.	X	.	.	.
Outside Public Sector	Inside Public Sector	.	X	.	.	.
Outside Public Sector	Outside Public Sector	.	X	.	.	.
Outside Public Sector	Joint Solution	.	X	.	.	.

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Industrial Standards

Internationally, technical specifications in government contracts are sometimes very high. This is particularly true of military contracts in which specifications often greatly exceed those normally used in commercial applications. The technology developed is frequently limited to the primary application and cannot be exploited commercially thus reducing the impact of government investment.

Guiding Principle 4:

To facilitate technology and IP transfer to the private sector, government will use generally accepted industrial standards and norms whenever possible.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	.	X
Inside Public Sector	Outside Public Sector	.	.	.	.	X
Joint Need	Joint Solution	.	.	.	.	X
Outside Public Sector	Inside Public Sector	.	.	.	.	X
Outside Public Sector	Outside Public Sector	.	.	.	.	X
Outside Public Sector	Joint Solution	.	.	.	.	X

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Mechanisms for Technology Transfer

When IP is generated through government research activities, it can be transferred to the private sector for commercialization through the following basic mechanisms:

• licensing;
• collaborative research; and
• the creation of spin-off companies.

Empirical analysis of the success and failure of numerous industrial projects shows that most of the factors that correlate with a successful development relate to the organization's capacity to:

• assess markets and competitors;
• conduct scale-up and engineering; and
• satisfy the needs of customers.

By contrast, R&D competencies correlate far less strongly with the final outcome. These findings suggest that government, working on its own, is not well qualified to assess the prospects for commercial success of IP. The best methods for transferring technology will, therefore, be through collaborative research followed by licensing, with spin-off of companies involving former government employees as founders being the last resort.

In a collaborative R&D venture, government and the private sector firms involved should have all of the competencies necessary to manage the process from the laboratory to the marketplace. Moreover, the collaborative research mode allows the transfer of IP that cannot be codified into patents and copyrights. These forms of IP include:

• trade secrets; and
• tacit skills that can only be passed on through apprenticeship styles of training.

The above considerations suggest guidelines for managing IP that relate mainly to the management strengths and weaknesses of the players involved.

Guiding Principle 5:

IP developed in collaborative R&D with industry generally stands the best chance of being effectively transferred to the private sector and commercialized. This mode of technology transfer should be favoured in the management of the IP. In instances where government R&D laboratories do not have a mandate to collaborate directly with firms, licensing of IP should be the favoured option.

Guiding Principle 6:

For departments and agencies that have an industrial development or support mandate, project selection should involve careful consideration of the market potential and value of the IP being targeted. Managers of IP should be involved in this assessment.

Guiding Principle 7:

IP may be embodied in various forms, including patents, copyrights, "know-how", trade secrets, etc. All forms of IP must be properly managed and respected.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	.	X
Inside Public Sector	Outside Public Sector	.	.	.	.	X
Joint Need	Joint Solution	.	.	.	.	X
Outside Public Sector	Inside Public Sector	.	.	.	.	X
Outside Public Sector	Outside Public Sector	.	.	.	.	X
Outside Public Sector	Joint Solution	.	.	.	.	X

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Improving Intellectual Property Management Techniques

The management of IP within government is often divorced from the R&D effort. IP managers tend to be involved in a project once a discovery has been made and need to be protected. This is a dangerous practice because it:

• eliminates the input of the IP manager from project selection and development - a situation that does not occur in the private sector;
• presumes that all valuable IP can be embodied into patents and copyrights which is not the case;
• tends to deny the research team the benefit of preliminary assessments of the commercial significance of projects; and
• exposes the research effort to premature or ill-advised disclosure of inventions.

Guiding Principle 8:

IP management is an integral part of the R&D process. It helps define the optimum research strategy. Managers of IP should be part of R&D teams during the entire course of project development.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	X	.
Inside Public Sector	Outside Public Sector	.	.	.	X	.
Joint Need	Joint Solution	.	.	.	X	.
Outside Public Sector	Inside Public Sector	.	.	.	X	.
Outside Public Sector	Outside Public Sector	.	.	.	.	.
Outside Public Sector	Joint Solution	.	.	.	X	.

Premature disclosure of inventions is an important problem that partially results from the lack of involvement of IP managers in the development of projects. Other factors that lead to careless management of IP are:

• a lack of awareness of the potential value of IP;
• a "publish or perish" approach to rewards and promotion; and
• failure to recognize that IP should be treated with the same consideration as physical assets of the Crown.

These three problem areas can be addressed through the application of the following principles.

Guiding Principle 9:

Human resources training is an essential component of IP management. It leads to improved R&D strategy and reduces the risk of premature disclosure. Departments must provide such training for scientists and their managers.

Guiding Principle 10:

The importance of contributions to the creation, management and exploitation of IP must be properly reflected in job descriptions and performance evaluations of employees.

Guiding Principle 11:

Government-created or -sponsored IP is an asset of the Crown. As such it must be treated with the same care and respect due to physical Crown assets. In particular, care must be taken to recognize the value of IP at the early stages of its development.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	X	.
Inside Public Sector	Outside Public Sector	.	.	.	X	.
Joint Need	Joint Solution	.	.	.	X	.
Outside Public Sector	Inside Public Sector	.	.	.	X	.
Outside Public Sector	Outside Public Sector	.	.	.	.	.
Outside Public Sector	Joint Solution	.	.	.	X	.

Surveys in other countries have shown that employees respond best to improving IP management when their performance is reflected in job evaluations and promotions. Receiving direct financial rewards such as a percentage of royalties received by the employer provides less of an incentive.

Although direct financial rewards do not provide a strong inducement to improve IP management, they need to be taken into consideration. At present, departments have a good deal of discretion in the way in which rewards are paid to individual scientists. The lack of uniformity across departments has the potential to lead to inequities in employment conditions. Moreover, some guidelines need to be established about rewards to employees who have supported a general research program that has led to the generation of a valuable IP but who have not necessarily been directly involved in the specific invention.

Guiding Principle 12:

To maintain employment equity, rewards to inventors and innovators in government employment must be made according to uniform principles established by the Treasury Board. Appropriate rewards should be given to the employees directly responsible for the development of an IP and to members of the support team that contributed to the work even if they were only indirectly involved in the discovery.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	.	.	.	X	.
Inside Public Sector	Outside Public Sector	.	.	.	X	.
Joint Need	Joint Solution	.	.	.	X	.
Outside Public Sector	Inside Public Sector	.	.	.	X	.
Outside Public Sector	Outside Public Sector	.	.	.	.	.
Outside Public Sector	Joint Solution	.	.	.	X	.

As the analytical grids indicate, management of IP is quite complicated because of the many different facets and situations that can develop. Codifying rules for the very large number of possible permutations is an essentially impossible task. The IP manager is first and foremost a deal-maker not a regulator. This implies that the use of extensively codified rules is likely to be counter-productive.

Guiding Principle 13:

The management of IP involves flexible business skills such as deal-making that are not readily translated into rules and guidelines. Given the complexity and diversity of IP issues, sharing of knowledge and experience across departments through mentoring and information exchange is considered to be an essential means for training and for management improvement.

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Competition Policy

The transfer of IP from government to the private sector may lead to conditions where a single firm has the opportunity to establish a monopoly.

Under some conditions providing a monopoly may be entirely appropriate. For example, if the discovery is a new pharmaceutical entity and the licensee is responsible for the entire clinical development of the product, the award of an exclusive license would be appropriate since the licensee needs a sufficient incentive to invest the tens of millions of dollars required to complete development.

On the other hand, if the government discovers a generic technique such as a new method for breeding plants or molding plastics, the award of an exclusive license would be inappropriate since the "enabling" technology would be of use to many firms who could use it to develop differentiated products.

Clearly, the approach to be taken in managing licenses must be governed by the concept of maximizing socioeconomic well-being for Canadians.

Guiding Principle 14:

When it awards an exclusive license thereby providing a monopoly to a firm, government should reserve the right to continue to use the invention in question for its own internal non-commercial purposes.

Guiding Principle 15:

The continuance of licenses should be conditional upon the licensee achieving predetermined performance milestones so that government can recover its property if the licensee fails to properly develop and exploit the IP.

Guiding Principle 16:

Licensees should be prohibited from assigning licenses to third parties without the consent of government since such an action may conflict with the obligation to maximize the use of the IP for the socioeconomic well-being of Canadians.

IP Issues Evaluation Grid
.	.	Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector	X	.	.	.	.
Inside Public Sector	Outside Public Sector	X	.	.	.	.
Joint Need	Joint Solution	X	.	.	.	.
Outside Public Sector	Inside Public Sector	X	.	.	.	.
Outside Public Sector	Outside Public Sector	X	.	.	.	.
Outside Public Sector	Joint Solution	X	.	.	.	.

The principles described above were formulated on the basis of a review of international practices in the management of government IP and from interviews with federal government IP managers. The background research is described in a report entitled: "Guiding Principles for the Management of IP - Research and Data Collection".